Future of cities: working paper

Foresight, Government Office for Science

The evolving economic

performance of UK cities:

city growth patterns

1981-2011

The evolving economic performance of UK cities: city growth patterns

1981-2011

Professor Ron Martin

Department of Geography, University of Cambridge, UK

Ben Gardiner

Cambridge Econometrics, and Department of Geography, University of Cambridge, UK

Professor Peter Tyler

Department of Land Economy, University of Cambridge, UK

August 2014

This review has been commissioned as part of the UK Governments Foresight Future of Cities Project. The views expressed do not represent policy of any government or organisation. Dedication: We dedicate this paper to the memory of the geographer Sir Peter Hall who sadly passed away while we were working on the final draft. He was one of the worlds leading urban scholars and urban planners, and leaves a colossal corpus of incisive and highly influential work. He will be sorely missed.

Contents

1. Introduction: motivation, aims and background .................................................................. 5

1.1 Cities and the national economy ........................................................................................... 5

1.2 Aims and objectives: what the paper is, and is not ................................................................ 7

1.3 Britains urban economy: a very brief and selective history ................................................... 8

2. Recent city growth evolutions ............................................................................................ 14

2.1 The national growth context ................................................................................................ 14

2.2 Economic growth across the urban system ......................................................................... 15

2.3 Convergence or divergence in city growth paths? ............................................................... 17

3. What determines city growth? ............................................................................................. 22

3.1 Dominant theoretical perspectives ...................................................................................... 22

3.2 Agglomeration and increasing returns ................................................................................. 22

3.3 Economic structure and city growth: specialisation or diversity? .......................................... 24

3.4 Human capital and city growth ............................................................................................ 26

3.5 Institutions and governance ................................................................................................ 27

3.6 Path dependence and city growth evolutions ...................................................................... 27

4. Does city size matter for growth? ....................................................................................... 31

4.1 The size distribution of British cities .................................................................................... 31

4.2 Evidence on city size and city growth .................................................................................. 33

5. Does economic structure matter? ....................................................................................... 35

5.1 Measuring city specialisation ............................................................................................... 35

5.2 Specialisation and city size ................................................................................................. 39

5.3 Specialisation and performance .......................................................................................... 40

5.4 Using dynamic shift-share to identify the evolving influence of economic structure on city

growth ....................................................................................................................................... 43

6. City competitiveness and productivity ............................................................................... 50

6.1 What is city competitiveness? ............................................................................................ 50

6.2 How do British cities differ in productivity? .......................................................................... 52

6.3 Productivity and output growth across cities ........................................................................ 55

7. Prospects and challenges ................................................................................................... 58

7.1 Future city growth paths ...................................................................................................... 58

7.2 Sources of growth in the post-industrial city ........................................................................ 59

7.3 Policy challenges ................................................................................................................ 64

7.4 Some final comments .......................................................................................................... 67

8. Annex: Definitions and data ................................................................................................ 70

8.1 Defining the cities ................................................................................................................ 70

8.2 Constructing the data .......................................................................................................... 73

References ................................................................................................................................ 77

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1. Introduction: motivation, aims and

background

As is commonly the case with the geography of a complex economic unit, the present makes no sense until it is related to the evolutionary process which has produced it. (Peter Hall, The Industries of London, 1962)

1.1 Cities and the national economy

Cities have long played a key role in national economic life and public and political discourse. But this primacy of the urban has now attained a critical, threshold. It is reckoned that for the first time in human history, more than half of the worlds population now lives in cities. Geographers and economists alike point to the increasing concentration of economic activity and wealth creation in cities, especially large and capital cities, many of which are also the key nodes that articulate and shape the global economy. Such global centres include not just advanced-nation primary cities such as New York, London, Tokyo, and Sydney, but also the vast and still growing cities of the newly-emerging economies, such as Beijing, Shanghai, Mumbai, and Rio de Janeiro. But it is not just capital cities that are powering national economies: many so-called second-tier cities, often provincial and regional capitals, are also growing rapidly (Parkinson et al, 2012). It is in cities that the most creative and talented people tend to concentrate (Florida, 2001; 2008), drawn by the presence of other such people, by the business and job opportunities found there, by the promise of higher wages and fortunes, by the scope for spending those incomes, and by the vast array of cultural and leisure amenities that cities contain. Cities have come to dominate how we think about economies. Indeed, some now talk of the triumph of the city as a global phenomenon. (Glaeser, 2012), and others view cities as leading the emergence of a new cultural-cognitive capitalism (Scott, 200, 2001).

Writing some thirty years ago, in her classic study on Cities and the Wealth of Nations, the North American urbanist Jane Jacobs (1984) argued that nations are not the key economic units, rather cities are. Cities, she contended, are themselves akin to macro-economies, local systems of production and consumption that although operating under a national monetary and regulatory framework, are the main arenas where, to use Alfred Marshalls (1920) phrase, the everyday business of economic life is conducted. Cities, she argued, are a nations main trading nodes, exchanging goods, services, capital, people and knowledge, with other cities, both domestic and overseas. National economies she claimed, can only be understood in terms of the growth (or decline) of their constituent cities. A similar view was later espoused by Paul Krugman, the Nobel Prize economist:

The economy as a whole is simply too big, too remote from ordinary experience, to grasp. Is there any piece of the economy that can truly help us understand the whole? I suggest a somewhat unusual answer, but one that is growing in popularity amongst economists: that a particularly good way to understand the American economy is by studying American cities. (Krugman, 1996a, p.206)

According to Krugman (1996b), and other new economic geography theorists, cities are quintessential examples of economic self-organisation, that is complex economic and social systems that arise and evolve largely out of the individual daily micro-behaviours of myriads of economic agents, which behaviours while displaying systematic patterns

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and rhythms, are largely independent of any externally imposed direction or control. Furthermore, the decisions and interactions of these co-located economic agents produce emergent effects - in particular, various forms of positive externality and spillover that appear and operate at the level of city as a whole, but which are not simply reducible to those underlying micro behaviours, and which enhance the competitive advantages of the activities that cities contain. The argument is that the spatial agglomeration of economic activities in cities, and the emergent externalities produced thereby, raises the productivity of those activities, of cities, and hence of the national economy as a whole.

However, cities are not necessarily unconstrained loci of economic growth. The spatial concentration of economic activity in cities may also lead to various diseconomies, such as pollution, congestion costs, and the bidding up of land costs, house prices, and wages, all of which may impose limits not just to the growth of cities but also to their productivity and competitive advantages. Moreover, as some recent highly visible examples testify, cities can go into relative and even absolute decline. Many cities have experienced the economic decline and environmental run-down of particular neighbourhoods, both inner-city and suburban, leaving serious social problems in their wake; this was a major theme in Jane Jacobs other earlier classic work on the Death and Life of Great American Cities (Jacobs, 1961). But in some cases, whole cities have experienced a reversal in economic fortune. The most celebrated contemporary example is probably Detroit, once the centre of the US motor industry, if not the global car industry (Binelli, 2013). In 1913 Henry Ford began mass producing motor cars at his innovative Model T plant, transforming the city into the Silicon Valley of its day. By 1920 it was the fourth largest city in the United States, and by 1950 General Motors had become the worlds largest employer. But from the 1960s onwards, with the combination of social upheavals, the search by the citys industry for cheaper labour and better tax breaks, industrial unrest, and urban planning problems, Detroit began to lose its industrial and economic dynamism. This process accelerated into the 1970s, 1980s and 1990s, so that by 2010 the population of Detroit had fallen from its peak of over 1.8 million to just over 713,000; between 2000 and 2010 its population shrank by a fifth. And in 2013, Detroit filed the largest municipal bankruptcy in US history. While Detroit is an extreme case of city decline, other examples, albeit less catastrophic, are not difficult to find. In the UK, Liverpool and Glasgow, both major port-cities that played a key role in Britains 19thC economic supremacy and Imperial trade, lost that function and their competitive edge during the course of the 20thC and have struggled to regain their former economic prominence. There is in fact growing concern about what has become known as the shrinking city phenomenon, as certain cities across the US, Europe and elsewhere appear to be declining in population and in economic growth (see for example, Wiechmann and Pallagst, 2012). How to manage this process, or perhaps stem or even reverse it, is now a problem attracting growing academic and policy attention.

But other cities show how a loss of economic and social momentum need not be permanent. There are examples of cities that have in effect reinvented themselves, and found a new economic role and renewed economic dynamism. Glaesers (2005a) study of the city of Boston in the US exemplifies this form of economic evolution. Boston has been able to survive and prosper despite repeated periods of crisis and decline. Boston has reinvented itself three times: in the early-19th century as the provider of seafaring human capital for a far flung maritime trading and fishing empire, in the late-19th century as a factory town built on immigrant labor and Brahmin capital, and finally in the late-20th century as a centre of the information economy. In all three instances, human capital admittedly of radically different forms provided the secret to Bostons rebirth. Munich provides another case of rejuvenation following major shocks. Evans and Karecha (2014)

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show how despite devastation in the Second World War, Munich recovered rapidly to become one of the fastest growing and most prosperous German cities, and though its economy seriously stalled and its population declined during the 1980s and 1990s, since then it has once again revived and out-performed the Germany economy as a whole.

The performance of a national economy will therefore largely reflect the performance of its individual cities, and how the economies of those cities develop and evolve will largely shape the future growth path of the national economy as a whole. Thus, to adapt Krugmans statement above, a particularly good way to understand the UK economy is by studying the UKs cities.

1.2 Aims and objectives: what the paper is, and is not

Accordingly, and in line with the brief for a backward-looking paper on the patterns of economic growth across Britains cities, the objective of this Working Paper is to chart and analyse the evolving comparative economic performance of the UKs main cities over recent decades, and to determine how growth paths have differed across cities. More specifically, the paper seeks to throw light on the following main (interrelated) issues:

To what extent has economic growth differed from city to city across the UK over the

past three decades or so? Key issues include whether London and the larger (core) cities have grown faster than other, smaller cities, or vice versa; whether city growth

trajectories been convergent or divergent over time; and how far city growth differences

are persistent (that is, how path dependent they are).

Does city size matter for economic growth? It is often argued that larger cities confer

greater economies of agglomeration and increasing returns effects, and that, holding

other things constant, these effects make for faster growth: in other words, that city size,

agglomeration and growth form a process of circular and cumulative causation. Is it the

case that the largest cities in Britain have been the growth leaders?

How far has economic structure influenced city growth? It is widely claimed that

specialisation is the motor of city growth. Is this true for UK cities? To what extent does

economic structure and specialization explain differences in growth rates across British

cities? Have city economic structures narrowed over recent decades?

Since productivity is a key aspect of growth, and is often viewed as an indicator of

competitiveness, how have British cities differed in their productivity performance over recent decades? Are British cities converging or diverging in terms of productivity?

What are the implications of recent city growth trends for current debates over spatially

rebalancing the economy? Are recent trends in the economic growth paths of UK cities likely to continue?

To provide some answers to these questions, this paper constructs and analyses a time series data set for some 63 British cities for the period since 1981. The details of the data and the definition of the cities studied are given in Appendix A. The construction of these data has been a major part of the basic research undertaken for this Working Paper, with the express purpose of revealing and providing insight into the different growth performances and trajectories of the 63 cities. It is important in this context to emphasise that the aim of the paper is not to undertake a comprehensive quantitative analysis of the

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determinants of the growth patterns so revealed: this is far beyond the remit of and resources available for this paper. Nor is it intended to be a synthesis, summary or evaluation of the existing voluminous literature in the field of urban economics. And yet further, it is not a case study of particular selected cities. Instead, its aim is to examine and compare growth trajectories across the UK urban system, as that system has been defined by the Foresight project. Before presenting this analysis, however, and in line with the original Foresight specification for this Working Paper, we give a brief (and thus necessarily superficial) history of the UK urban economy to provide some background context.

1.3 Britains urban economy: a very brief and selective history

The origins of the UKs towns and cities reside in the distant past, as a system of market centres, trading posts, military settlements, and ports. It is not our purpose here to delve into those deep historical roots, but simply to note that the basic network of the UKs system of towns and cities can be traced back to Roman times, if not before, and that a distinct urban network and urban hierarchy was certainly well established by the beginning of the Middle Ages. Though subject to the vagaries of agricultural crises, plagues and civil war, this network remained largely unaltered right through to the 16th and 17th centuries.

Since then, and necessarily simplifying, three broad historical phases of urban economic growth and development might be distinguished (Table 1.1). The real growth and transformation of the UKs urban system took place with the onset of the Industrial Revolution in the mid-18thC. By 1800, the invention of steam power radically improved Britain's core industries, especially the production of textiles, metalwork and other manufactured goods, and the mining of coal and other raw materials. By 1820 the potential of the steam engine as a viable source of power for ships, machinery and railway locomotives had been realised. These developments formed the basis for Britains unprecedented economic growth over the rest of the 19thC, and its rise to world economic supremacy as a trading nation. They also fuelled a dramatic growth of the population living in towns and cities. This was the period when towns and cities assumed the key role as the drivers of national economic growth, when the previously dominant rural-agricultural economy gave way to a rapidly expanding urban-industrial economy. Different towns and cities came to have different types of industry, some because of first mover advantages often associated with happenstance or serendipitous events or circumstances, some because of what economists call first nature advantages, that is favourable geographical factors such as accessible harbours or proximity to specific natural resources (such as coal and iron ore), and still others because of so-called second nature advantages, that is various externalities that develop through the process of localized economic specialisation itself and which reinforce a particular developmental path.

Thus during the course of the 19thC a distinct geography of urban industrial activity developed which reflected the inherent or acquired different comparative advantages of different towns and cities. Different regional and subregional groups of towns and cities become dependent on and propelled by particular types of industry. The most prominent such grouping was that of the Lancashire towns and cities. Lancashire had pioneered the factory production of textiles, helped by the combination of local coal to provide power, soft water, a damp climate, and the nearby ports of Liverpool and Manchester. By the mid-19thC the towns and cities of the region - especially Manchester, Liverpool, Bolton, Oldham, Blackburn, Preston and Burnley - accounted for two-thirds of world trade in

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cotton goods, the source of more than a quarter of the nations overseas earnings. Liverpool played a key role in this trade; indeed, in the early-19th century it claimed to be the second trading city of the Empire, after London. Meanwhile in West Yorkshire, a vibrant woollen industry was expanding, concentrated in centres such as Leeds, Wakefield, Halifax and Huddersfield.

Other industries also developed a distinct pattern of localised urban concentration. During the 19thC British shipbuilding came to dominate world production. At their peak just before the First World War, shipyards in Glasgow, Newcastle, Sunderland, Liverpool, London, Southampton, Portsmouth and Belfast built eight out ten new ships in the world. Between 1870 and 1914, Glasgow alone produced almost one fifth of the worlds ships.

Table 1.1: Two centuries of evolution of the urban economy: a stylised summary

1800 Industrialisation

1900 Industrial Reorientation

1970 2000 Post-Industrialisation

Major economic development trends

Industrial revolution, based on export driven Empire-orientated trade and commerce. Key staple sectors: coal, textiles, shipbuilding

Leading technologies: steam, powered by coal; Electricity towards end of period. Development of railways

Mounting international competition towards end of century

Laissez faire state and free trade policy

Inter-war recessions and industries. Emergence and development of mass production manufacturing. New economic sectors based on consumer goods, motor vehicles, chemicals. Growth of public services

Leading technologies: electricity, combustion engine, later electronics

Long post-1945 boom assisted by regulated international financial system and Keynesian welfare state managed economy at home

De-industrialisation of economy sets in.

Rapid growth of professional and business services. Accelerating globalization and financialisation of the economy. Succession of deep recessions

Rapid technological change; micro-electronics, computers, internet, broadband

Unraveling of post-war Keynesian welfare state model. Growth of neoliberal state stance

City economies Emergence of economically specialized towns and cities.

Groups of towns and cities linked in regional production networks, orientated towards exports of goods (eg textiles), supply of raw materials (coal, iron) and means of transportation (ships, railways)

Interwar structural problems affect mainly northern towns and cites; London, and towns and cities in South East and Midlands attract bulk of new consumer goods industries

Growth of cities as private and public service centres.

Deindustrialization of cities especially London and major conurbations, and subsequently spreading to smaller towns, especially in northern and midlands regions

Shift to service based urban economies Increasing importance of cultural industries.

Major expansion of Londons role as national and global financial centre

City growth Rapid growth of population in towns and cities, including movement from rural hinterlands into urban areas

Overcrowding in many industrialising towns and cities

Emergence of a definite urban hierarchy, dominated by London.

Increasing interest in decentralizing population out of London.

Net movement of population from northern towns and cities to southern England.

In latter part of the period, population decline in most large conurbations, especially London.

Depopulation of major cities slows and some show renewed population growth, especially London.

Policies to regenerate inner-city areas.

Some smaller cities exhibit most rapid growth in population

In fact, most of the growth industries of the period depended directly or indirectly on cast iron, that staple of the Victorian era. From the machinery used in factories and mining, to the construction of bridges, to the building of ships and the railways, the new urbanised economy was forged in the iron works found in numerous towns and cities in the North West, West Midlands and Yorkshire-Humberside. The railways played a particularly

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formative role. In 1825 the Stockton and Darlington Railway opened, followed by the Liverpool and Manchester Railway five years later. The age of the railway had begun, reducing transport times, lowering transport costs, consuming raw materials and stimulating investment in towns and cities. The railways transformed the connectivity between cities, dramatically increasing the movement of people and freight between them. They stimulated industry across the urban system, including the construction of extensive locomotive engineering works in centres such as York and Derby. Construction teams and British capital built railways throughout the Empire, and beyond, not only fuelling the British mechanical engineering industry, but helping to open huge and long lasting markets to British manufacturers more generally.

While the industrialisation of Britains landscape during the 19thC stimulated the rapid growth of northern and Midlands towns and cities, its effects were also felt in southern parts of the country, and especially in London. By the start of the 19thC London was the worlds largest port. Trade - much of it with the expanding Empire - grew throughout the century, stimulating factories, power stations and shipyards along the banks of the Thames. Other parts of the capital had accumulated a vast array of industries, including clothing and textiles, leather goods, food and drink, furniture making, light engineering, and shipbuilding. The city had already become the nations financial capital, and one of the worlds most important financial centres.1 Up until the middle of the 19thC, the British banking system had been a regional and county-based system, but through merger, acquisition and amalgamation, and successive waves of local bank closures, by the end of the century most of the surviving major banks had become headquartered in London, where the primary institutions of the Bank of England, Lloyds Insurance and the main Stock Exchange had been established more than two centuries earlier.2 Just as Britain was a leading industrial nation, so London was its largest centre of industry, finance commerce and services.

Britain thus entered the 20thC with an urban economy founded on more than a century of sustained industrialization and international economic leadership. Over the next four decades, however, a combination of forces and events wrought major changes to this system. Even before the end of the 19thC several of the Victorian staple industries, and the towns and cities that housed them, had begun to experience the first winds of international competition, notably from the United States, Germany and Japan. The deep economic recessions of 1922-24 and 1929-32 merely compounded the structural pressures on these industries, resulting in massive increases in unemployment, poverty and social unrest in many northern towns and cities. Meanwhile, a new economy, based around new mass consumer goods and new methods of production was emerging. The importation of mass assembly production methods transformed the British car industry between the Wars, leading to the construction of large scale plants and associated components supplier networks in Manchester (Ford), Cowley near Oxford (Morris), in the West Midlands towns of Longbridge (Austin) and Coventry (Rootes and Standard), and in Dagenham in Essex (Ford). The electrical, clothing and furniture industries also expanded, particularly in and around London.

1 In the 18

thC London ranked alongside Amsterdam and Paris as a leading international financial centre. In

the 19th,

Amsterdam had been overtaken by Berlin and New York, but London retained its prominent position, while in the 20

thC the international financial system became organized through and controlled largely by

London, New York and Tokyo.

2 The Bank of England was established in 1688, Lloyds Insurance in 1694, and the London Stock Exchange in 1698. In fact these institutions had their predecessors in the Royal Exchange that was established in London in 1591.

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Indeed, between 1919 and 1939, London alone attracted half of all new manufacturing establishments in these and related sectors, with other concentrations in the nearby towns of Slough, Welwyn and Watford (Hall, 1962; Scott, 2007). Meanwhile, Londons dominant position in Britains urban hierarchy, its high concentration of wealthy individuals, its roles as Britains national and Imperial capital and main port for international trade, its highly developed service sector, and its strong nodality with respect to inland transport and distribution networks, all gave it markedly strong market access advantages. While towns and cities in southern Britain did not escape the economic uncertainties and disruptions of the inter-wars years, they faired far better than those in northern regions: a major historical and geographical shift in urban economic dynamism, from northern to southern cities, had begun - what Scott (2007) has termed the triumph of the South.

This southwards geographical shift, and especially the concentration of economic activity and population in London, had already given rise to concern over what some saw as a growing spatial imbalance in the geographical organization of the national economy. The famous Barlow Commission Report (1940) was quite emphatic and not a little controversial in its views about this imbalance:

The contribution in one area of such a large proportion of the national population as is contained in Greater London, and the attraction to the Metropolis of the best industrial, financial, commercial and general ability, represents a serious drain on the rest of the country. (para 171)

This report had a major influence on the new regional policy model introduced by the Labour Government in 1945, one of the aims of which was to divert economic activity and population away from London and other towns and cities in the south and Midlands of Britain towards towns and cities in the designated depressed or Assisted areas in the North West, North East, South Wales and Central Scotland. The main mechanism used to divert investment from southern cities to those in the northern Assisted areas was the controversial Industrial Development Certificate, which effectively restricted new manufacturing investment and factory expansions in the south. From the mid-1970s onwards, however, as deindustrialization set in, and the volume of new potentially footloose manufacturing investment declined nationally, so the impact of the policy slackened substantially.

There were also a number of other policies from the late 1940s onwards that began to affect the economic development of cities in both the north and south of the United Kingdom. Urban spatial policy, like regional policy, followed closely the thinking behind the Barlow Report with an emphasis on constraining city expansion through Green Belts and accommodating new growth in New Towns and overspill developments in the hinterlands around selected cities. For much of the period up until the late 1970s there was an extensive policy focus on improving the quality of housing in the cities, particularly the inner areas. This was coupled with much new urban transport infrastructure that sought to accommodate the virtually insatiable demand of motorists for urban road space. It was not until the White Paper on Policy for the Inner Cities (Department of the Environment, 1977), which highlighted the economic decline of Britains inner cities, that an era of urban policy began, this time concerned with bringing economic growth back into the cities.

Little is known as to how much urban and regional policy tended to reduce the growth of London, Birmingham and other cities in the South of England and how much it benefited cities in the North over the period up until the late 1970s when both policies were dramatically reduced in their intensity. Estimates of the numbers of jobs diverted by

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regional policy away from southern cities to northern regions vary, but most suggest that between 1960 and 1981, as many as 500,000 jobs may have been involved (Moore, Rhodes and Tyler, 1987). In fact, major cities across the UK were losing manufacturing firms. As Gudgin, Moore and Rhodes (1982) observed for 1948-1975 period, whereas over 1000 firms moved into the six main conurbations (Glasgow, Newcastle, Liverpool, Manchester, Birmingham and London), over 300,000 moved out. They estimated this to be equivalent to about a quarter to a third of the total manufacturing job losses from the conurbations over this period.

In any case, by the late-1960s, the economic problems that had remained largely hidden in many of the UKs cities began to (re)surface with the onset of an historic process of deindustrialization (Martin and Rowthorn, 1986). Nationally, from its historical peak of 11.5 million in 1966, industrial employment began a process of relentless decline that has continued to the present day (2.9 million). Deindustrialization has both positive and negative dimensions. On the positive side, it reflects a developmental tendency observed in most advanced economies whereby technological advances enable manufacturing firms to increase production with fewer workers; that is, it is a consequence of rising productivity. Deindustrialization does not necessarily pose a problem if output continues to grow fast enough to support a countrys balance of trade, and if services expand fast enough to ensure full employment. In the UK, however, this was arguably not the case. From the late-1960s onwards, Britain experienced a rate of deindustrialization faster than almost every other advanced economy, and many observers attribute this as much to inherent weaknesses in manufacturing as to positive (productivity) aspects of deindustrialization (Rowthorn, 1986).

Table 1.2: Deindustrialisation and the cities: manufacturing employment change, 1960-1978

As percent of 1960

Employment

London -42.5

Conurbations -26.5

Free-Standing Cities -13.8

Large Towns -2.2

Small Towns 15.7

Rural Areas 38.0

Great Britain -11.5

Notes: Conurbations: Manchester, Merseyside, Clydeside, West Yorkshire, Tyneside,

West Midlands Free-standing cities: Other cities with populations of more than 250,000 Large towns: Towns or cities with populations of 100,000 to 250,000 Small towns: Districts with at least one town with population of 35,000 to 100,000 Rural areas: Districts in which all settlements have a population of less than 35,000 Source: Fothergill, Gudgin, Kitson and Monk (1986)

The key point is that by the end of the 1970s, deindustrialization had become a distinctive feature of the UKs major conurbations and cities (Table 1.2): London lost over 40 percent of its manufacturing jobs between 1960-1978, and between them, the other six major conurbations all of which had been leading centres of industrial growth in the

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19th century - lost over 25 percent of their employment in manufacturing. What little growth in manufacturing employment that occurred over this period was to be found in small towns and greenfield rural areas, leading some observers to talk of an urban-rural shift. Some authors attributed this shift to a decline in the attractiveness of cities for industrial activity, and in particular to the high costs and space constraints in densely developed urban locations (Fothergill and Gudgin, 1982; Tyler, Moore, Rhodes, 1988), others to urban-rural differences in the enterprising behaviour of firms (Keeble and Tyler, 1995). No doubt these and related factors played some role. But the fact of the matter is that by the end of the 1970s a major historical re-orientation of Western capitalism had begun, driven by changes in consumer demand, the rise of new international (and lower cost) competitors, technological advances, and emergent processes of globalization and financialisation. Since the late-1970s, and in common with other Western nations, the UK has been undergoing a fundamental transition to a post-industrial, information-based, service economy (Turner, 1995; Kellner and Young, 2001; Wadhwami, 2002; Martin, 2006a). The UKs cities, like those in other advanced economies, have lost their traditional role as powerhouses of manufacturing activity, and their prosperity now and into the future will depend on finding a new role in this latest phase in the evolution of capitalism. It is against this background and these trends that we now turn to a detailed investigation of what has been happening to the economic growth performances of UK cities over the past three decades or so.

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2. Recent city growth evolutions

2.1 The national growth context

The period covered by our analysis, 1981-2011 is a period in which the growth dynamic of the national economy appears to have changed. Although the three decades from just after the Second World War up to the early-1970s often labeled a post-war golden age - were years of steady and sustained economic growth with only mild recessions, the UKs growth rate actually lagged behind that of other advanced economies (Figure 2.1), with the result that the country slipped down the international league table of per capita GDP. But after 1980, and certainly up to 2007, the UKs average growth rate relative to that of several of its competitors improved somewhat (the growth rate of those competitors slowed below that of the UK), so that its position actually improved (Figure 2.1). At the same time, however, this comparative improvement in growth has been characterized by a marked increase in its cyclicity, with one phase of growth following the deep recession of 1980-82 and another phase following the deep recession of 1990-92. Whether or not this second phase, which lasted from 1992 to 2007, was indeed the longest NICE (non-inflationary continuous expansion) period on record, as some claimed, the idea that it signaled the end of boom and bust, as was also claimed, unfortunately tempted fate too far: the deep contraction that hit the economy in 2008, triggered by the banking crisis, brought the longest boom on record to an abrupt halt. Recovery from this last recession has been a protracted process.3

Figure 2.1: The growth of per capita GDP in the UK, 1950-2012, in international context

Source of data: The Conference Board Total Economy Database, Groningen Growth and Development

Centre (www.conference-board.org/data/economydatabase/)

3 The fall in output in the recession of 2008-2010 was the worst since that in the Great Depression of 1929-

32. In fact, the recovery from the 2008-2010 contraction has been the slowest on historical record, far slower than the recovery from the Great Depression. It has taken six years for output to return to its pre-recession peak in 2008.

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Among the issues raised in the debates surrounding the causes, consequences and solution to the economic crisis of the past five years, is the argument that economic growth in the UK, especially over the 1993-2008 period, had become too spatially and sectorally unbalanced. The concern is that economic growth has become too dependent on London and the South East of England, that northern regions and cities have been lagging behind, and that this imbalance in the economic landscape has became a source of instability.4 So how have the UKs cities performed economically over the past 30 years or so?

2.2 Economic growth across the urban system

Our analysis is based on a time series data set we have constructed for UK cities as defined by the primary urban areas (PUAs), as identified by the Centre for Cities, and which have been adopted by the Foresight Future of Cities programme as the basis for much of its analysis. These PUAs, it should be noted, are not necessarily functional economic areas, like, for example, travel-to-work areas (see for example, Cheshire and Magrini, 2009), but rather refer to the built-up areas (based on contiguous local authority districts) of the cities concerned. As a result, some PUAs will underbound cities defined, say, on a functional travel-to-work basis. However, travel-to-work areas have their own problems and limitations (see Appendix for discussion), not least the fact that constructing time series data of the sort we use here would involve very considerable effort, and indeed would itself almost certainly necessitate approximation, again using local authority districts. Nevertheless, the limitations associated with PUAs need to be born in mind in what follows. The details of the data constructed for the system of PUAs are described in the Appendix. The series refer principally to annual estimates of workplace employment and output (real Gross Value Added), and hence by derivation a measure of productivity, that is output perworker employed, for some 46 major sectors of economic activity, for 63 PUAs, for the period 1981 to 2011.5 These series afford a means by which to examine the growth trajectories and economic performance of these PUAs over what, as described above, has been, and still is, an era of dramatic change in the national economy.

4 Our economy has become more and more unbalanced, with our fortunes hitched to a few industries in one corner of the country, while we let other sectors like manufacturing slide (David Cameron, Prime Minister, 2010); For years, our prosperity has been pinned on financial wizardry in Londons Square Mile, with other sectors and other regions left behind. That imbalance left us hugely exposed when the banking crisis hit. We need to spread growth across the whole country and across all sectors (Nick Clegg, Deputy Prime Minister, 2010).

5 The Centre for Cities defines 64 PUAs in the United Kingdom. Unfortunately, it was not possible to construct comparable and reliable time series data for the Belfast PUA, and so this city has been excluded from our analysis (which throughout the paper is therefore for 63 PUAs). This is regrettable but necessary for statistical consistency. Thus where we refer to the national average, it is usually the Great Britain average which is being used.

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Figure 2.2 Economic Growth (Output and Employment) Across UK Cities (63 PUAs), 1981-2011

(Average Annual Percentage Change)

Source of Data: See Appendix Note: Output is Gross Value Added at constant 2009 Prices

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Figure 2.2 ranks our 63 cities according to their average annual growth rates of output (real gross value added) over the entire 1981-2011 period, and also shows their corresponding average annual growth rates of total employment. The striking feature is just how far British cities have varied in economic performance over the past thirty years or so. At one end of the spectrum are the fastest growing cities of Milton Keynes, Swindon, Telford, Crawley, Reading, Peterborough, Bournemouth, Warrington and Northampton, all with an average annual growth rate of output of 2.9 percent or more. Significantly, most of these are centres that were designated as new, expanded of overspill towns, mainly in the late-1960s or 1970s, and which have benefited from explicit growth and development strategies, implemented by dedicated institutional bodies (both central and local). These cities exemplify what can be achieved by purposive intervention involving the spatially integrated provision of housing, infrastructure and sites and premises for industry and other activities. At the other end of the distribution are Liverpool, Hull, Birkenhead, Grimsby, Dundee, Middlesborough, Wakefield, Stoke, Blackpool, Wigan, Sheffield and Doncaster all of which grew at or around only half that rate (1.45 percent per annum). These are all old industrial or service centres that in the beginning of our study period had ageing infrastructures and housing stocks. Those cities that have grown fastest in terms of output have tended to be those that have also seen the fastest growth in jobs over the three decade period, and conversely those that have registered the slowest rates of economic growth have seen the smallest increases in their employment base (Figure 2.3). Successful cities, in other words, are those that not only have a higher rate of wealth creation, but also of job creation. Cities that lag in wealth creation (output growth) tend also to create fewer jobs.

2.3 Convergence or divergence in city growth paths?

These differences across cities in overall growth rates suggest that individual cities have been following quite different growth paths over the past 30 or so years. One way of showing these paths is by means of cumulative differential growth evolutions, a method used to striking effect by Blanchard and Katz (1992) in their seminal paper on regional economic growth in post-war USA (see also Gardiner, Martin, Sunley and Tyler, 2013). This procedure plots the cumulative sum, year by year, of the difference between the

percentage growth rate of a given city i in a given year t,

git, and the corresponding

growth rate of the national economy (here Great Britain as a whole),

gNt, so that for any

year t+k the cumulative growth differential up to that point is expressed as

The advantage of this simple measure is that it shows how a citys differential growth path (of output, or employment) has evolved and changed over time: for example, it can reveal not only persistent trends in the relative growth of paths of cities, but also any changes in direction or turnarounds in a citys relative growth trajectory.

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Figure 2.3: Relationship between output growth and employment growth across British cities, classified into north and south:

(Average Annual Growth Rates for 1981-2011)

Source of Data: See Appendix

Figure 2.4 plots the evolving cumulative growth differentials of real GVA for the fastest growing cities (growth leaders), and the slowest growing cities (growth laggards). The former are those cities in which real GVA grew by 20 percentage points or more above the GB average over the whole 1981-2011 period, and the latter those in which real GVA grew by 25 percentage points or more below the GB average. Figure 2.5 shows the corresponding plots for employment growth: for those cities with a cumulative differential growth in jobs of 15 percentage points or more above the Great Britain rate, and those cities in which employment grew by 25 or more percentage points less than the nation as a whole.

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Figure 2.4: Cumulative differential output growth paths: fastest and slowest growing cities (GVA in 2009 prices), 1981-2011

Source of Data: See Appendix

Two key features stand out from Figures 2.4 and 2.5. The first is that, as expected from Figure 2.3, there is a close correspondence between the growth-leading and growth-lagging cities as measured by output, and those as measured by employment. Second, while there has been much debate surrounding the existence and extent of a North-South Divide in the countrys economic landscape (see Martin, 2004, for an overview), the cumulative differential growth performances of the nations cities certainly do seem to map out a broad geographical division of this sort. Third, what is also evident is that much of the divergence between the fastest and slowest growth groups of cities occurred during the 1980s and 1990s. Since then, the growth rates among the growth leaders (both in output and employment) have attenuated, so that their cumulative growth advantages has tended to stabilise. The majority of the slowest growing cities (growth laggards), however, have experienced a consistent pattern of slower growth over the entire period. The exceptions are Liverpool and Sunderland. Liverpool had the lowest rate of output and employment growth of any of our study cities during the 1980s and first half of the 1990s, but since then its growth has been more or less the same as the national average, so that its cumulative growth disadvantages in output and employment have at least stopped increasing. The same happened to Sunderlands relative employment growth path from the beginning of the 1990s onwards.

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Figure 2.5: Cumulative differential employment growth paths: fastest and slowest growing cities (GVA in 2009 prices), 1981-2011

Source of Data: See Appendix

It is also instructive to examine certain other cities. London and the eight so-called English core cities are of particular interest. These cities, together with Scotlands core cities of Edinburgh and Glasgow, and Cardiff in Wales, currently account for about 40 percent of British gross value added. As such their economic performance obviously has a major bearing on that of the national economy as a whole. Londons role has attracted special attention in this respect. During the long boom of 1992-2007, London was singled out by observers and Governments alike as the dynamo of the UK economy, and a source of vital foreign earnings, tax contributions to the public finances, and of demand for goods and services from across the rest of the country.6 In their study of regional growth paths in the UK since 1971, Gardiner, Martin, Sunley and Tyler (2013), and Martin (2013), show how up until the early-1990s, Londons economic growth (in terms of both output and employment) actually lagged behind that of the nation as a whole. A turnaround in Londons differential growth performance then occurred, fuelled by the dramatic expansion of financial and knowledge intensive business services, and its growth rate overtook that of the national economy. This turnaround is clearly evident

6 Indeed, such was the apparently unstoppable success of Londons financial services based economy that

Gordon Brown, as Chancellor of the Exchequer, repeatedly celebrated the citys growth, claiming it to be a shining example of what a highly skilled, high value added, talent driven workforce could do (Brown, Mansion House Speech, 20 June, 2007).

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in Figure 2.6. By 2011, and even allowing for the financial crisis of 2007-2008 and the recession of 2008-2010, Londons output growth rate had pulled well ahead of all of the core cities, with the exception of Bristol, and its employment growth had also improved noticeably. As for the rest of the core cities, only Edinburgh, Leeds and Cardiff have kept pace with the national growth rates of output and employment. The remaining cities have consistently underperformed, and have fallen progressively behind the rest of the national economy. Cumulative underperformance has been especially marked in Birmingham, Glasgow and Sheffield, and acutely so in Liverpool. Even Manchester, often regarded as the UKs second city, has in fact lagged national growth over the past 30 years, taken as a whole.

The significance of using cumulative differential growth paths to chart city output and employment evolutions is that these indicate the sheer scale of the growth gaps that have opened up between British cities over recent decades. Thus to take the extreme cases in Figure 2.4, between 1981 and 2011 a growth gap of some 130 percentage points had accumulated between Milton Keynes at the top of the growth league table, and Liverpool at the bottom. Put another way, if Liverpools economy had consistently grown at the same rate as that of Milton Keynes over the 30-year period, by 2011 its real GVA would have been more than double what it actually was. Figures 2.4 and 2.5 indicate that the catch-up task facing many of Britains lagging cities is a daunting one.

Figure 2.6: Cumulative differential growth paths of London, the English core cities, Edinburgh, Glasgow and Cardiff, 1981-2011

Source of Data: See Appendix

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3. What determines city growth?

3.1 Dominant theoretical perspectives

What explains these marked and sustained variations in economic growth across UK cities over the past three decades or so? What does theory have to say on the economic growth of cities? Over the past thirty years a truly vast corpus of literature has emerged on city economies, under the aegis of the New Neoclassical Urban Economics, the New Economic Geography, Regional Science, and related disciplines. The New Neoclassical Urban Economics, for example, has constructed sophisticated models, and marshalled a growing body of econometric analysis, on the internal spatial structures of cities, on land prices within cities, on city sizes, on the forces driving the spatial concentration of people and firms in cities, on identifying externalities and agglomeration economies in cities, and on the patterns of industry location and wage differentials across urban systems. A not dissimilar set of issues has also attracted attention within the New Economic Geography. It is not possible to summarise or assess this enormous literature here, but certain key themes are certainly relevant, namely: agglomeration economies and increasing returns effects; the role of economic structure, and especially specialisation versus diversity; human capital, including creative labour; and institutions and the form of economic governance. Although often discussed and analysed separately in the literature (a notable exception is Ahrend et al, 2014), in reality these various factors or determinants interact in complex ways: thus a citys particular mix of industries will shape the nature of its agglomeration externalities, the skill profile of its workforce, its enterprise culture, and even the sort of institutions (for example trade associations) that develop there. It is this complexity that makes it difficult to formulate any single, comprehensive model of city growth.

3.2 Agglomeration and increasing returns

What holds a city together? And why are the locations of cities so persistent, even though both individuals and firms continually turn over? The answer normally found in the literature is that cities form, grow and survive because of agglomeration economies, in which spatial concentration itself creates the favourable economic (and social) environment that supports further or continued concentration and growth (Glaeser, 2008). There is of course an element of circularity, of assuming ones conclusions, in attributing cities to the existence of agglomeration economies: agglomerations exist because of agglomeration economies and the latter exist because cities are agglomerations. The basic contention, however, is that the spatial agglomeration of people and firms in cities gives rise to various positive externalities that are a source of increasing returns and hence competitive advantage to the activities located there. Economists have long discussed the possibility of increasing returns to scale within firms and industries, but the idea that the spatial agglomeration of activity may be a source of external increasing returns also has a well established pedigree, going back to Alfred Marshall (1920) if not earlier. And in recent years, interest in the external economies and increasing returns effects that allegedly accrue from the spatial concentration and localisation of activity has expanded apace (see, for example, Fujita, Krugman and Venables, 1999; Fujita and Thisse, 2002: Baldwin et al., 2003; Rosenthal and Strange, 2003, 2004; Duranton and Puga, 2004; Graham, 2007; Greenstone, Hornbeck and Moretti, 2010; Coombes, Duranton and Gobillon, 2011; Coombes, Duranton, Gobillon, Puga and Roux, 2012).

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So what are these increasing returns effects generated by the spatial agglomeration of economic activity in cities? Essentially they relate to various attributes that arise at the level of city as a whole from the myriad actions and interactions of spatially proximate individual economic agents (firms, workers and consumers), which attributes, while external to those agents, then influence in positive ways those very actions and interactions. In the parlance of complex systems theory, such external economies or increasing returns effects are emergent macro-level phenomena emanating from the behaviours and interactions of micro-level components, on which those emergent phenomena then exert downward causation. Alfred Marshall (1920) in his work on British industrial districts in the 19thC identified three such external economies of localization: the building up of a pool of specialized and skilled labour, on which local firms could draw; the emergence of specialized suppliers and intermediaries, serving those firms; and the creation of a local pool of knowledge and know-how, what he called an industrial atmosphere, or something in the air, that shapes the production activities and the business practices and confidences of local firms. Since then, Marshalls triad of externalities has been elaborated by numerous authors, and now includes innovation spillovers, local supply-chains and networks, dedicated institutions, social capital, and local business and enterprise cultures. Geographers talk about the local buzz generated by the social and economic interactions in cities (see Storper, 2013). New Economic Geography models emphasise the home market effects associated with the concentration of large numbers of consumers in cities.

In much of this body of literature the argument (or assumption) is that these externalities and the increasing returns effects they generate help to stimulate a process of cumulative and circular growth which increases productivity, which in turn increases competitiveness and hence exports, and thence more output growth. Further, a high rate of growth makes a city attractive to both labour and capital inflows from elsewhere (both domestically and overseas). Thus buoyant employment prospects and high wages (permitted by high productivity growth) will draw in workers from other parts of the national economy, and potentially from other countries. Such inflows are argued to involve selection and sorting effects, such that the more skilled, enterprising and creative workers in particular are attracted to cities. Likewise, a high rate of growth will attract capital funds, again from domestic and international sources, in search of high returns. In effect, such inflows act to raise the growth ceiling of the city in question, when otherwise it might encounter supply-side constraints to its growth.

Two implications or predictions can be drawn from the literature concerning the impact of agglomeration, first that agglomeration economies lead to a higher level of productivity, and second, that because of the increasing returns effects to which agglomeration gives rise, city growth is likely to be a selfreinforcing process. The evidence on these issues is not, however, unequivocal. Much of the empirical work on agglomeration and city performance is cross sectional, for example linking agglomeration and productivity and wage levels across a sample of cities at a given period, and is heavily inflected with equilibrium assumptions and modeling. By comparison, there is much less on how agglomeration and growth interact and change over time, that is on long-run dynamics. The issue is akin to the distinction between static and dynamic increasing returns. Agglomeration economies will be dependent on the sort of activities carried out in a city, and as different activities wax and wane, so the externalities associated with agglomeration may likewise change. In an interesting paper, Potter and Watts (2011) find that agglomeration economies in cities may shift from being positive to negative as the industries involved themselves undergo evolutionary life cycles. Thus a city that experiences sustained deindustrialization is likely to find that the positive externalities that had developed around its manufacturing base likewise decline. It may well be that

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cities have to rebuild agglomeration economies from time to time, as their economic structures change. We know little about the long-run dynamic evolution of agglomeration economies.

Similarly, agglomeration may over time lead to the build up of negative externalities or diseconomies. A high density of activity and population in a city generates various diseconomies, such as congestion, environmental degradation (for example air pollution), high wage and land costs, and high house prices (Coombes, Duranton and Gobillon, 2012). In New Economic Geography models, the tradeoff between the positive and negative externalities of agglomeration influences the shape of the relationship between agglomeration and growth, so that growth increases at low to medium spatial concentration of activity, but decreases at high levels of concentration. These models also point to the possible negative market crowding effects of agglomeration. In short, increasing agglomeration does not necessarily map into ever-higher growth: bigger is not necessarily best.

3.3 Economic structure and city growth: specialisation or

diversity?

There has long been an ongoing debate about whether specialisation is a good thing when it comes to a citys long-run performance and ability to withstand shocks, that is, its resilience.7 Generally speaking, the debate revolves around two types of externality: Marshallian (Marshall, 1920) and Jacobsian (Jacobs, 1969). Marshallian externalities are those that arise from local industrial specialization, and as mentioned above, three such externalities are typically emphasized. The Marshallian specialization externalities thesis asserts that cities with production structures orientated towards a particular industry will be more innovative because localized specialisation allows and promotes knowledge and techniques to spill over between similar, related, firms (see Altunbas, Jones and Thornton, 2012).8 Jacobs externalities are said to characterise cities with more diversified economies, and have to do with the scope and opportunities for interaction and knowledge spillover between complementary industries and sectors of activity. The argument is that exchange of complementary knowledge across diverse firms and economic agents within an urban agglomeration facilitates search and experimentation in innovation. Therefore, a diversified local production structure leads to increasing returns and gives rise to urbanization or diversification externalities.

At the same time, both types of city economy have potential disadvantages (Table 3.1) (see also van der Panne, 2004; Farhauer and Krll, 2012). Thus a specialised city is likely to be more vulnerable to idiosyncratic industry-specific shocks, and possibly also to the onset of negative path dependent lock-in (see below) whereby a high degree of technological or production interrelatedness amongst firms (caused, for example by imitation of techniques, or a complex horizontal inter-firm division of labour) may

7 For a detailed of the notion of resilience in relation to regional and city economies, see Martin and Sunley (2014) 8 Marshallian externalities are now generally referred to as Marshall-Arrow-Romer (MAR) externalities, on

account of the subsequent elaborations of Marshalls original argument by Arrow (1962) and Romer (1986). Glaeser et al (1992) formalized the MAR model in relation to cities. Spillovers of knowledge between local firms in a given industry can arise for various reasons, for example as a result of direct forward and backward supply chain linkages among firms involved in a horizontal division of labour in the industry in question, from inter-firm movements of workers who carry knowledge with them, or from joint firm collaborative activities in the development of new processes or products, to name but some.

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eventually hinder innovation, and slow down adaptation in the face of external competition.

Table 3.1 Specialised versus diversified cities

Specialised Cities

(Marshallian Externalities)

Diversified Cities

(Jacobs Externalities)

Advantages

Specialised pool of labour

Access to wide pool of labour skills and talent

Development of specialised knowledge base and inter-firm knowledge spillovers

Cross-fertilisation of ideas across different sectors can lead to knowledge spillovers and product innovations

Presence of up and downstream firms Diversity (variety) offers market scope for new ventures and suppliers

Tend to be smaller, hence less crowding costs

Better able to withstand shocks (diversity or modularity acts as buffer)

Sector-specific institutions Tend to be larger, and hence offer a significant home market

Disadvantages

More risk from adverse shocks, especially in mono-sector cities

Tend to be larger, leading to higher production costs (wages and land)

Prone to path dependent lock-in (eg because of technological relatedness of firms, imitative innovation, or dense input-output relationships)

The net result of these different advantage and disadvantages is hard to gauge. Most arguments point in favour of stronger productivity growth in specialized cities where Marshallian externalities dominate, although the variance of this growth is likely to be higher as specialized cities are both more prone to, and less able to absorb, shocks. However, much is dependent on the time span being analysed, as it is possible that over any given period the shocks might not be random, but biased in favour of certain sectors due to emerging trends such as globalization, technology, financial services liberalization, and so on. Thus it becomes difficult to say much from the theory alone. Further, the empirical evidence in support of specialisation or diversity is mixed, and again is influenced by the level of sectoral disaggregation permitted by available data, and the particular measure of specialization or diversity (variety) employed. The evidence remains inconclusive as to whether Marshallian specialization or Jacobian diversification externalities are the more conducive to innovation and growth. Several studies report evidence of both types of externalities. Nevertheless, some observers are quite emphatic about the advantages of specialisation: according to Storper (2013) for example, specialization is the motor of city growth.

Others, however, argue that the distinction between Marshallian specialisation and Jacobs diversification is in fact too stark. Farhauer and Krll (2012), for example, argue in favour of a third type, diversified specialisation - where a city or region specialises in a few (related) sectors but is otherwise diversified - rather than the extremes of mono-specialisation and full diversification. The argument is that these types of city would, to some extent, benefit from both types of externality and thus could exhibit higher rates of growth. Yet others have suggested the idea of related variety (see, for example,

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Frenken et al, 2007) as being key to regional or city growth, where by related variety is meant a group (or groups) of economic activities that share or have overlapping or related features such as inputs, markets, specialised knowledges, skill sets, or technologies. Such types of relatedness are deemed to confer advantages in the spillover of knowledge and the generation and diffusion of innovations. Measuring related variety is not, however, straightforward or unproblematic. And, like specialisation, related variety may actually be a source of instability, since the greater the degree of relatedness, the lower the degree of modularity in the local economy, so that a shock (say a collapse of demand) in one sector in a related group may quickly ripple through the other sectors in that group, thereby exacerbating the original disruption.9 These various debates and issues not only raise problems as to how to measure specialisation and diversity, but also for predicting the likely relationship between sectoral structure and economic performance.

3.4 Human capital and city growth

Where there is more consensus is over the importance of human capital for city growth. Human capital was initially introduced to augment the neoclassical (Solow, 1956) growth model, but in the new growth theory, jumpstarted by Romer (1989), has produced two distinct approaches on how to incorporate human capital into models of economic growth. The first regards the accumulation of human capital (essentially skill acquisition and learning) as the engine of growth, while the second emphasises the role of the human capital stock (intellectual and knowledge capital) in the process of innovation and adoption of new technologies. Although empirical measurement issues abound in studies that seek to determine the actual contribution that human capital makes to economic growth (and of course there is reverse causation since a higher rate of economic growth may lead individuals to demand more education and training because higher growth has a favourable effect on wages), on balance the evidence seems to indicate that educational expansion, skill acquisition and training all contribute to output growth (Schtt, 2003).

In terms of city economies, here too the evidence points to a positive influence of human capital on growth. The ability of a city to attract and retain highly educated and qualified labour would appear crucial to its economic prosperity and success. Following Glaeser (1994) and Simon and Nardinelli (1996, 2002) there have been numerous studies documenting the powerful connection between between skills and city growth. Initial skills are correlated with subsequent population growth, wage growth and house price growth (Glaeser and Saiz, 2004). This connection occurs in the USA, UK and elsewhere, and seems to have become stronger over the post-war period. Furthermore, cities that have highly skilled residents seem to be better able to adapt to changing economic circumstances and opportunities, and to attract, nurture and develop new industries and reinvent themselves (Glaeser, 2005a). Other scholars point to the ability to attract so-called creatives (those with artistic, technical and scientific talents) as key to a citys economic success (Florida, 2002, 2008). Again, there is a strong degree of two-way causation: the presence of well-educated, skilled, talented and enterprising people tend to increase a citys growth rate and its productivity, and a growing city will tend to attract more of those very same types of labour. Why cities differ in their stocks and

9 The notion of modularity refers to the degree to which the components parts (or sub-systems) of a complex system are able to function independently of one another, such that if one or more of those parts fails or is disrupted, the system as a whole can continue to operate. The more interrelated and interdependent are the component parts, the less the modularity of the system concerned.

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accumulation of skilled, highly educated and enterprising people, and how such variations feed back to influence growth rates across cities, are thus key research and policy issues.

3.5 Institutions and governance

A recent focus in the literature on urban economic success - on why some cities prosper more than others is on the role that institutional arrangements and governance structures play in promoting and facilitating growth. The argument is that the nature, thickness and orientation of both formal and informal institutions (the latter often includes references to social capital) can exert a significant influence of a citys economy, positively or negatively. The attitudes of local public and private bodies towards growth and development, the local presence of pro-business groups and associations, the degree of local autonomy over raising tax revenues and over expenditure, and the presence of strong local leadership with vision, all these can contribute to the perception and reality of a city as a place to locate and expand businesses, and to attract and retain workers. There is increasing interest in the different governance models that are found different cities especially as between countries and whether best practice forms can be identified and possibly transferred from one context to another. In their analysis of city productivity in five OECD countries, Ahrend et al (2014) found that cities with fragmented governance (administrative) structures tend to have lower levels of productivity. Metropolitan areas with twice the number of municipalities were found to be associated with 6 percent lower productivity, an effect that is mitigated by almost half when a governance body at the metropolitan level exists.

Interestingly, however, this effect was weakest (in fact not statistically significant) in the case of the UK. Nevertheless, there is much current discussion and debate in the UK over two key governance issues: the case for strong city mayors, with powers akin to those enjoyed by the mayor of London; and the highly centralized nature of the public funding that supports social, economic and infrastructural services in the UKs cities. These two issues figure prominently in the study by Lord Heseltine into how to promote more growth in localities and cities outside London. Having more powerful and visionary mayors in British cities whilst possible necessary to promote growth, would not of itself be sufficient: what would also be needed is a more devolved system of local government finance, to allow such mayors to undertake actions backed up by the necessary funds. The fact of the matter is that the evidence on how governance models influence city growth is far from unequivocal or comprehensive enough to come to firm conclusions. Indeed, some studies suggest that the growth dividend associated with more decentralised and devolved systems of governance may have been overstated (Pike et al, 2012).

3.6 Path dependence and city growth evolutions

While Urban Economics and New Economic Geography models undoubtedly help illuminate differences in productivity, wages, prices and the like between cities, they are much less useful for understanding long-run trends and shifts in a citys growth path, that is how city economies evolve. Equilibrium notions and models are not well suited for this task. While Urban Economics and New Economic geography models might claim to allow for history by showing how different initial conditions lead to different equilibrium outcomes, the models are still equilibrium based. But as complex, highly open, dynamic entities, city economies need never be in equilibrium, and instead are constantly evolving, sometimes slowly, at other times more rapidly. Identifying the forces that make

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for continuity and those that make for change, and how the two interact, may therefore throw useful light on city growth paths over time. To that end, ideas and concepts from evolutionary economics and the theory of complex adaptive systems may be useful. The fact there is as yet no agreed formal evolutionary model of city economic growth and development of a sort to rival the technical sophistication of Urban Economics and New Economic Geography models does not mean evolutionary ideas have no explanatory purchase.

One such idea that has spawned a sizeable literature in economic history, and several other social sciences, is that of path dependence. In path dependence economics, as pioneered by David (1985; 1993, 2005) and Arthur (1999), at any point in time, the state of an economy depends on the historical adjustment path taken to it. That is to say, an economy is an irreversible historical process in which future outcomes depend to some degree on past events and outcomes: an economy inherits the legacy of its own past. Thus current structures and arrangements, themselves influenced by previous structures and arrangements, condition future possibilities. Path dependence is certainly not a theory of economic growth, but the notion does focus attention on those structures, forces and mechanisms that tend to impart a self-reinforcing momentum to a given pattern of (spatial) economic development (Martin and Sunley, 2006; Martin, 2010; Martin, 2013).

So construed, the notion of path dependence is of relevance for understanding the different growth paths of different cities. Indeed, path dependence is quintessentially a place dependent process, in the sense that a citys previous developmental path, which to a large degree will be unique to that city, will condition to some extent the possibilities for its future development. Development growth paths get locked-in. Several potential sources of such lock-in can be identified (Table 3.2), and the nature and relative mix of these will vary from city to city, reflecting each citys specific form of past economic development. Furthermore, lock-in can be positive or negative. In the former case, a virtuous growth regime becomes cumulatively self-reinforcing: Milton Keynes may well fit this scenario. Over time, however, a positive growth regime may lose its momentum, or it may be disrupted by a major external shock (such as a citys loss of its principal export markets), and a process of decline may set in, which then becomes self-reinforcing, so that a form of negative lock-in or path dependence becomes established: Liverpools economic evolution may be illustrative of this change in the nature and direction of path dependence.

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Table 3.2 Sources of path dependence in city growth and development

Source Features

Natural resource based Citys development path shaped by dependence on a particular raw material (eg coal, oil, forestry products, etc), and the technical possibilities this provides for related and derived industries.

Sunk costs of local assets and infrastructures

Durability (quasi-irreversibilty) of a citys capital equipment, especially in heavy industries and its physical infrastructures, such as urban built form, transport system and the like, which remain in use, and shape economic development possibilities, because fixed costs are already sunk while variable costs are lower than total costs of replacement.

External economies of industrial specialisation

Citys economy based on cluster(s) of specialised activity characterised by dynamic externalities and untraded inter-dependencies common pool of specialist skilled labour, dedicated suppliers and intermediaries, local knowledge spillovers, and local co-ordination effects, such as networks of co-operation, business practice conventions, etc., all of which create a high degree of local economic inter-relatedness.

Technological or innovation system Development of a distinctive specialised technological regime or innovation system through processes of local collective learning, mimetic and isomorphic behaviour, dedicated technology and research organisations, inter-firm division of labour and other forms of technical inter-relatedness.

Economies of agglomeration Generalised self-reinforcing development based on various agglomeration externalities, such diverse labour pool, large market, thick networks of input-output relations, local supply chains, services and information. Wide scope for various specialist functions and activities.

City-specific institutions, social forms and cultural traditions

Development of locally specific economic and regulatory institutions, social capital, social infrastructures and traditions, all which embed economic activity into a specific trajectory.

External linkages and inter-dependencies

Development path of a city may be shaped by those in other cities and regions, though intra-industry and inter-industry linkages and dependencies; reliance on financial institutions elsewhere; and influence exerted by economic and regulatory policies pursued in other locations and at national level (or even beyond).

Note: Adapted from Martin and Sunley (2006)

What the idea of path dependence also highlights is the importance of new path creation, of the capacity of a citys economy to adapt over time by shifting or branching from old, mature and perhaps stagnating sectors into new more productive and more dynamic ones. Path dependence, in other words is not simply or solely about lock-in; it is also about how new pathways of growth and development emerge, and in our context, why this process varies from city to city. The capacity for new path creation may itself depend on a citys previous economic development path, since its existing range of industries, occupations, skills and technologies will be expected to exert some influence on the possibilities for developing new industries and technologies.

Some city economies, by nature of the features associated with their particular economic activities, may provide enabling environments for the emergence of new sectors that are able to build upon or branch out of those former activities. In other cases, the very nature of a citys inherited economic structures may be much more constraining of such economic adaptation or reorientation. For example, compare London and Birmingham. Historically, both were major national centres of manufacturing, and both experienced sustained deindustrialisaton from the early-1970s onwards. But London, unlike Birmingham, also had a long-established core of financial and business services. With the growth in importance of these activities from the late-1980s (aided by the wholesale de-regulation of banking and financial markets from 1986 onwards), not just nationally, but globally, London was well placed to embark on a new growth path largely denied to Birmingham (and other UK cities). Moreover, the very nature of Birminghams manufacturing base dominated by car production and related engineering activities, and the knowledge systems these involve has arguably proved less enabling as a platform for economic re-orientation.

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It is certainly not being suggested here that path dependence fully explains the divergent differential growth paths revealed in Figures 2.4.2.5 and 2.6; far from it. But that path dependent processes influence city development trajectories, there can be little doubt. By the same token there can be little question that the future economic success of many of the UKs cities, and especially those whose economic growth has persistently lagged that of the national economy taken as a whole, will depend, in part at least, on their capacity to reorientate their economies around new development pathways.

It is not our aim or purpose here to seek to assess the empirical significance in the UK context of these various factors that have been argued to influence the economic performance of cities. That would require an extensive study in its own right, and in the case of some of the claimed determinants, the required data are simply not available for the system of cities and time span discussed in this Working Paper. It is possible, however, to undertake some limited exploration of some of the ideas discussed above.

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4. Does city size matter for growth?

4.1 The size distribution of British cities

The issue of city size and its relationship to growth has long held a fascination for urban analysts. The most well-known feature concerning city size is the so-called Zipfs Law, or rank-size rule. This rule states that the population of a city is inversely proportional to its rank. If the rule held exactly, then the second largest city in a country would have half the population of the biggest city; the third largest city would have one third the population, and so on. Put another way, if we plot the ranks of a countrys cities (on the x-axis of a graph) against their populations (on the y-axis), using logarithmic scales, then the line relating rank to population is downward sloping, with a slope of -1.

Now, according to Overman and Rice (2008) while medium sized cities in England are, roughly speaking, about the size that Zipfs law would predict given the size of London, the largest city, the major second-tier cities (which include the so-called core cities) all lie below the Zipf line and hence are smaller than would be predicted. They go on to state that:

It is important to note that this feature is not a consequence of London being too large. If we had predicted the population of Englands largest city by drawing the Zipf line through the medium size cities and projecting to the y-axis then we would obtain a figure not much different from that of the actual population of London. Of course, such a simplistic exercise comes with a number of important caveat (not least the fact that Zipf's law need not necessarily hold for English cities and that the exact definition of urban areas will affect the relative size of urban areas). But, the Zipf plot is at least indicative of the fact that, for England, second tier cities may be too small. (op cit, p. 3, emphasis added).

Such an argument would suggest that there is scope for increasing the size of the provincial core cities, so as to gain the advantages of agglomeration.

However, this conclusion may not be entirely correct. As Krugman (1996a), argues, while the Zipf relationship holds fairly closely for the cities of the United States, and has done so over a long period of time, indicating a pattern of equal proportionate growth across the urban system, this is not necessarily the case elsewhere:

Zipfs law is not quite as neat in other countries as it is in the United States, but it still seems to hold in most places, if you make one modification: many countries, for example, France and the United Kingdom, have a single primate city that is much larger than a line drawn through the distribution of other cities would lead you to expect. These primate cities are typically political capitals: it is easy to imagine that they are essentially different creatures from the rest of the urban system. (Krugman, op cit, p. 41, emphasis added).

A similar point is made by Gabaix (1999), who argues that:

In most countries Zipf plots usually present an outlier, the capital, which has a bigger size than Zipfs law would warrant. There is nothing surprising there because the capital is indeed a peculiar object, driven by unique political forces. (op cit, p.756, emphasis added).

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If we actually fit a regression line relating rank and size (as in Gabaix, op cit), then we get a result that can be interpreted as confirming the statements of Krugman and Gabaix. Thus in Figure 4.1, which shows the relationship between city size and rank for 1981 and 2012, not only is the slope about -0.8 rather than -1.0, London lies well above the fitted line in both cases; indeed, its outlier position increased slightly over the period.10 London, in other words, demonstrates well the special or unique character, referred to by Krugman and Gabaix, of being larger than would be predicted from the overall size-rank relationship that exists in Britains urban system as a whole. The second and third largest cities, Birmingham and Manchester, lie on the fitted line, and thus could be regarded as not being too small, al